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CAD: China or Oil proxy? – Deutsche Bank

FXStreet (Delhi) – Sebastien Galy, Macro strategist at Deutsche Bank, notes that from 2002 on, USD/CAD traded as a function of oil prices on the back of an emerging Asian economy.

Key Quotes

“While this trend was evident over long periods of time, it was obscured over shorter periods by divergences in monetary policy.”

“As oil prices collapsed from their peak, the weight of energy in the Bank of Canada commodity index declined from a peak of 60% down to 52%.”

“We find that industrial metals have a higher correlation to USD/CAD than Oil over the long-term, a point confirmed with finer methodology. As the economic relevance of metals is rather limited for Canada, it is an indication that CAD loads on a cyclical factor, most likely a proxy trade for China.”

“While the intensity of such proxy trades varies over time, their relevance appears far more clearly with patience. At a weekly frequency, the elasticity of USD/CAD to copper is –0.21. This is higher than for oil (-0.04) and surprisingly the elasticity to the 2 year sovereign yield spread.”

“While the link between USD/CAD and Copper is economically at best questionable, it is a symptom of a market trading on broad factors, simplifications of more complex economic models. Such trading can and do push the CAD on the basis of the same common trade. Such findings reinforce our bearish outlook on CAD vs USD.”

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